Venezuela’s Debt Gets a Boost After Cabinet Reshuffle

Venezuela’s debt got another breather on Monday after President Nicolas Maduro signaled he might loosen the straight-jacket constricting the oil-rich country’s economy.

Mr. Maduro, who was inaugurated Friday following a narrow win in a snap election to replace his deceased mentor, strongman Hugo Chavez, took his first step toward a potential economic policy shift Sunday with a cabinet reshuffle. He returned central bank chief Nelson Merentes to head Venezuela’s finance ministry, effectively demoting Jorge Giordani, a trained electrical engineer turned leftist urban planning academic who had long served Mr. Chavez, most recently as both planning and finance minister.

“The Monk,” as Mr. Giordani has been known for his statist ideology and austere demeanor, has been one of the principal drivers of Venezuela’s web of price and strict foreign exchange controls.

“Mr. Merentes’s appointment suggests that there will probably be more flexibility in terms of foreign exchange policy, and potentially in other areas, though political constraints will likely continue to limit the degree to which Mr. Maduro can be more moderate in economic policy,“ political risk consultant Eurasia Group said.

Heavy pressure on Venezuela’s debt in the aftermath of Mr. Maduro tight electoral victory-he won with a margin of less than two percentage points amid allegations of widespread irregularities—eased late last week after his allies in the electoral agency acceded to opposition demands for a recount, defusing a tense political climate.

The market also liked what it saw in the cabinet reshuffle, with the country’s 2023 dollar bonds inching up to 94.87 bid to yield 9.812% Monday from Friday’s 94.39, yielding 9.892%, according to Markit. The cost of credit insurance also ebbed, to 773 basis points, from 783 basis points in the last session.

But investors shouldn’t get too sanguine about the outlook for Venezuela’s debt, which more than doubled during Mr. Chavez’s 14 years in power, with Mr. Giordani clearly favoring domestic debt over foreign debt issuance. That could change under Mr. Merentes, who previously served as finance minister under Mr. Chavez.

Even following a recent 32% devaluation in Venezuela’s official exchange rate to VEF6.3 a dollar, the “Strong Bolivar” is trading around four times the official level in the black market. The foreign exchange controls have a created a severe dearth of dollars available for imports into an economy that must import some 70% of what it consumes, driving shortages of everything from food to intermediate goods in many of the country’s badly atrophied industrial sectors.

Scarcity has also been a prime contributor to inflation that’s expected to run upwards of 30% this year. A number of economists expect the economy to slip into recession in 2013.

“We concede that a large issuance of U.S. dollar external bonds to the local corporate sector—similar to deals that were done in 2007-09—could be the most effective way to quickly bring down a black market rate that exploded higher in 4Q12 and has continued to hover well over USD/VEF 20 since the turn of the year,” J.P. Morgan said in a note.

Barclays said it expects $6 billion in issuance this year, split evenly between sovereign sales and those of the state-oil company.

Mr. Merentes is also expected to “fully support” the implementation of a new, alternate official foreign exchange supply system that should allow the government to sell dollars at a weaker rate, which would also help it to lower its budget deficit, Barclays noted.

But nothing will be easy. Unwinding the distortions afflicting Venezuela’s economy will come with heavy trade-offs. Lifting the price controls or selling dollars at weaker bolivar exchanges rates will fuel the already high inflation. Reducing heavy subsidies of food, fuel, housing, health care and other things risks social unrest, which won’t be easy for a new president without his predecessor’s charisma and much of a mandate.

Oil prices are likely Mr. Maduro’s, and Venezuela’s, greatest vulnerability. Any further ebbing in crude prices would badly hurt a country that depends on oil for more than a third of its gross domestic product, about three-fifths of its public spending and more than 90% of export receipts.

If oil prices continue to recede, so should the price of Venezuela’s debt.